Jefferies Trader Charged in Hoodwinking Taxpayers

Written by: Antoine Gara01/28/13 - 3:20 PM EST

Tickers in this article:
AB BK IVZ JEF

NEW YORK ( TheStreet) -- The Securities and Exchange Commission has charged a former Jefferies(JEF) managing director for fraudulently using a taxpayer-supported program to illegally profit from efforts to revive the U.S. mortgage market after the housing bust.

On Monday, the SEC charged Jesse Litvak, a former managing director and senior trader in Jefferies' mortgage-trading unit, with fraud for improperly marking mortgage-backed security trades to customers and creating fictitious ones in an effort to inflate the revenue the investment bank recognized on the trades -- and his bonus.

In total, the SEC alleges Litvak booked $2.7 million in improper revenue through the alleged fraud. During the time of Livtak's alleged fraud, the SEC claims the trader made nearly $12 million in discretionary bonuses -- money the commission may attempt to recover.

From 2009 to 2011, the SEC alleges Litvak misled customers in 25 mortgage-backed security trades by either misrepresenting the price at which Jefferies had paid for the securities it was selling or by misleading investors about the market demand for them. It appears U.S. taxpayers were the hoodwinked party on the other side of Litvak's alleged fraudulent trades.

Notably, the SEC's complaint says Litvak's alleged fraud profited from the U.S. Department of Treasury's Public-Private Investment Program ("PPIP") aimed at reviving the dormant mortgage market in the wake of the financial crisis.

In that program, the Treasury invested in funds aimed at buying up eligible mortgage-backed securities to thaw the mortgage-security market -- a crucial, if little-known, part of the U.S. housing industry -- and help calm banks' stressed balance sheets.

Under PPIP, a vehicle that was part of the government's larger $700 billion Troubled Asset Relief Program , the U.S. Treasury selected a handful of asset managers and hedge funds to invest in once-highly-rated mortgage securities as a means to revive demand for the overall market.

The SEC's complaint points out that many of those asset managers may have been financially harmed by Litvak's alleged fraud.

In a detailed complaint, the SEC points out trades made between Jefferies and PPIP funds run by BlackRock(BK) , AllianceBernstein(AB) , Invesco(IVZ) , Wellington Management , Putnam Investments and Anglo Gordon as having either been mismarked or misstated in demand by Litvak.

Hedge Funds such as Monarch Capital, York Capital Management, QVT and Magnetar are also named as victims of Litvak's alleged fraud.

Some trades with PPIP-backed counterparties netted Jefferies in excess of $500,000.00 in in illicit earnings, according to the SEC's complaint.

"On numerous occasions from 2009 to 2011, Litvak lied to, or otherwise misled, customers about the price at which his firm had bought the MBS and the amount of his firm's compensation for arranging the trades," the SEC alleges in its complaint. "On some occasions, Litvak also misled the customer into believing that he was arranging an MBS trade between customers, when Litvak really was selling the MBS out of Jefferies' inventory," the regulatory agency adds.